Banks have legally mandated reserve requirements. Is it time for companies in certain FRB (Frequently Requiring Bailouts) industries to also have some level of required cash reserves? What would be some arguments against, apart from ye olde “too much government regulation”?
U.S. airlines want a $50B bailout. They spent $45B buying back their stock
101–110 of 164 posts
Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock
#102I really hate that this argument keeps popping up. There's plenty of reasons to hate bailouts or airlines or anything else, but who the hell could have predicted the world was going to shut down like this in 2015-2019? We were in one of the biggest bull markets in the history of the United States, business was good, and the companies used some of that money to buy back stock. People make it sound like they were buyin…
The right way to structure this is to issue $50B worth of stock to the government. The airlines can buy it back with future profits to prop up the price once things are back to normal, while keeping the company afloat and retain jobs now. The shareholders would protest, and should be allowed a right of first refusal. Put in money at the same price per share to avoid dilution if you want to. Their alternative is bankr…
Why not loans? Pandemic is not the fault of the airlines, just like small businesses around the world, most airlines just need a short term loan to resolve liquidity issues while the pandemic blows over. Loans are safer investments than buying stocks.
Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock
#103Earlier quoted context omitted.
You might not expect that some particular disaster is going to happen, but you can expect that some setback is going to occur, eventually. The good times do not last forever. It's not like the principle of having a reserve for bad times is a new idea (see also: ant, grasshopper). If our corporate overlords bet everything on short term gain, and left nothing for the tomorrow that they thought would never come, why sho…
Yeah, but most setbacks lead to a 10% drop in flights, not 99. This is quite material. A company that anticipated up to a 20% drop in flights and saved to last a year with that, will only be able to last a few months with a basically 100% drop in flights. That is exactly what we're seeing now.
You could always limit it to companies that can show the money which would have been used if there was a limited decline in business. Separate the ones who did indeed behave responsible and were caught by this extraordinary event from those who bought back stock without thinking about tomorrow.
Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock
#104I really hate that this argument keeps popping up. There's plenty of reasons to hate bailouts or airlines or anything else, but who the hell could have predicted the world was going to shut down like this in 2015-2019? We were in one of the biggest bull markets in the history of the United States, business was good, and the companies used some of that money to buy back stock. People make it sound like they were buyin…
Who could have predicted in August of 2001 that a terrorist cell would hijack airplanes and use them as missiles resulting in a massive decrease in the number of passengers?
You really don't have to look too far in the history of the airline industry to see examples of black swan events.
Independent of the COVID-19 pandemic, I can think of at least two other scenarios that would destabilize the revenues of airlines:
(1) A catastrophic airplane crash that disrupts air travel and/or changes consumer sentiment towards airline safety. Consider that US aviation is in an extended safety streak and most Americans cannot quickly recall a time other than 9/11 when an airplane crash resulted in death.
(2) A change in the price of oil that drastically alters ticket prices. This is not likely given the current climate and the mitigation that airlines now undertake vis-à-vis oil futures, but a plausible scenario nonetheless.
Given that me, a random guy that knows fuck-all about airlines, can come up with 2 scenarios where revenues are disrupted without any foresight, it begs the question whether the airlines are acutely aware of their "too big too fail" status.
It seems their preference to enrich executives and shareholders all while hedging against any catastrophic events with a government bailout should be on par with 2008-era financial misconduct.
Prediction: Airlines will receive a bailout and face little repercussions for their poor planning.
Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock
#105In good times, people complain about companies like Apple "hoarding cash". Now, people complain about companies redistributing profits to their shareholders--many of which are ordinary people holding shares in their 401(k)'s or otherwise. They really cannot win.
Apples cash hoard was all sitting overseas because it couldn’t be repatriated, no? That’s kind of a different scenario... they didn’t really choose to hold cash. They just didn’t want to pay the tax to bring it to the states.
But once the corporate tax rate was brought back in line with the rest of the developed world, Apple brought the money back to fund buybacks and dividends. When you have more cash than available attention, that's the right thing to do: return it to shareholders.
Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock
#106I really hate that this argument keeps popping up. There's plenty of reasons to hate bailouts or airlines or anything else, but who the hell could have predicted the world was going to shut down like this in 2015-2019? We were in one of the biggest bull markets in the history of the United States, business was good, and the companies used some of that money to buy back stock. People make it sound like they were buyin…
> No business is going to hoard 50 billion dollars in an emergency fund for a pandemic that cuts 90% of revenue, that's just absurd.
That just isn't right, for a number of reasons.
First, the 50 billion applies to the entire industry, so the "emergency fund" of an individual company is going to be much smaller. Imagining an airline holding 1 billion in a buffer, rather than using it for stock buybacks, isn't that far-stretched.
Second, 90% loss of revenue isn't the problem, it's how long this revenue stays down that is the problem. The FAA closing the skies for a week should not be a problem, a month is going to be a huge problem, and a quarter might already be fatal.
Third, preparing for such scenarios is commonplace in the financial industry, for example. (I have a sibling comment regarding that). Banks are now expected to be resilient enough to survive another another 2008-like crisis on their own, without taxpayer-funded bailouts. And these expectations are not merely high-level, there are entire hordes of specialists, both in banks and with regulators, that do nothing else other than model various scenarios.
Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock
#107Earlier quoted context omitted.
Sure — what are your other options if you have lots of cash? 1. Keep it in cash and get sub-inflationary levels on it, and perform poorly due to your lack of leverage. 2. Invest it in other market securities, effectively running some hedge fund. Not a great idea, distracting from your core biz, and shareholders may not appreciate the exposure to outside risk. 3. Buy back your own stock, which gives back to shareholde…
4. Invest it in your core biz. 5. Invest it in research 6. Buy other companies to extend your core biz.
6a. Buy a company to get into a new line of business (Comcast/NBC, Yammer/LinkedIn/GitHub), a transformational divestment followed by rebirth (IBM, Nokia)
6b. Buy up and coming evolutionary competitors before your way is obsoleted by their way. (Red Hat, Instagram, WhatsApp, all the SD-WAN companies getting swallowed.)
6c. Buy competitor and dismantle it to consolidate and reduce competition.
Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock
#108In good times, people complain about companies like Apple "hoarding cash". Now, people complain about companies redistributing profits to their shareholders--many of which are ordinary people holding shares in their 401(k)'s or otherwise. They really cannot win.
Apples cash hoard was all sitting overseas because it couldn’t be repatriated, no? That’s kind of a different scenario... they didn’t really choose to hold cash. They just didn’t want to pay the tax to bring it to the states.
>they didn’t really choose to hold cash.
I'm not sure what you mean by this, but if companies are going to hold large amounts of cash, it would be fiscally irresponsible not to seek the best possible tax treatment for it within the law. If people think it's inappropriate for companies to hold cash overseas, those concerns should be addressed towards lawmakers.
Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock
#109I really hate that this argument keeps popping up. There's plenty of reasons to hate bailouts or airlines or anything else, but who the hell could have predicted the world was going to shut down like this in 2015-2019? We were in one of the biggest bull markets in the history of the United States, business was good, and the companies used some of that money to buy back stock. People make it sound like they were buyin…
You might not expect that some particular disaster is going to happen, but you can expect that some setback is going to occur, eventually. The good times do not last forever. It's not like the principle of having a reserve for bad times is a new idea (see also: ant, grasshopper). If our corporate overlords bet everything on short term gain, and left nothing for the tomorrow that they thought would never come, why sho…
Financialization requires the money to be used "productively" instead of sitting in reserves waiting. Everyone wants a higher stock price and/or dividends instead of long term stability. I recently came across a saying that summed it up well:
"MBAs think companies make money. Companies make shoes."
When you abstract the details away again and again and again, eventually you forget that the details exist and matter.
Re: U.S. airlines want a $50B bailout. They spent $45B buying back their stock
#110Earlier quoted context omitted.
Yeah, but most setbacks lead to a 10% drop in flights, not 99. This is quite material. A company that anticipated up to a 20% drop in flights and saved to last a year with that, will only be able to last a few months with a basically 100% drop in flights. That is exactly what we're seeing now.
I know everyone likes "the good ol' days" but this is a teachable moment. Sometimes you get the bear, sometimes the bear gets you.
No its not. No company should prepare for its business model to be made illegal. The best outcome for shareholders there is to return money to them before the business model becomes impossible and declare bankruptcy.